Schedule I of IBBI Regulations Only ‘Ordinarily’ Applies, Liquidator May Set Stricter Auction Terms: Karnataka HC Upholds EMD Forfeiture

The Karnataka High Court in a recent case has held that Schedule I of the IBBI (Liquidation Process) Regulations, 2016, applies only “ordinarily,” and does not prevent a liquidator from prescribing stricter auction terms, including forfeiture clauses, in the Auction Memorandum. The Court therefore set aside the Single Judge’s order directing a refund of ₹70 lakh to the bidder.

The dispute arose from the liquidation of Samrudhi Realty Ltd., where the petitioner, Sri Dinesh Pulipati, was declared the successful bidder for Block IV (“Song of Winds”) in an e‑auction. Under Clause 6.2 of the Auction Memorandum, the successful bidder was required to accept the LOI within two days, failing which the EMD and PDM were liable to forfeiture.

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The bidder, however, emailed the liquidator stating that he could not accept the obligations in the LOI, particularly the requirement to execute an MOU with homebuyers and negotiate cost escalations under Clause 4.3. He expressly stated he had “no intention of commencing the project” and would not sign the LOI unless the terms were modified.

The liquidator treated this as a refusal to proceed and forfeited the EMD and PDM. The Single Judge later held that Schedule I of the IBBI Regulations did not permit forfeiture and ordered refund of ₹70 lakh. The liquidator appealed.

The Division Bench of Justice Vibhu Bhakru and Justice CM Poonacha reversed the Single Judge, grounding its reasoning in both statutory interpretation and established precedent on earnest money.

The court noted that the writ petitioner's challenge to the forfeiture rests essentially on two grounds. First, that forfeiture of the said amount violates Section 74of the Contract Act, 1872; second, that the same is contrary to the IBBI Regulation.

The writ petitioner contended that since the IBBI Regulations were in force at the material time, that is, on the date of the auction, did not provide for forfeiture. Therefore, it was not permissible for the Liquidator to forfeit the PDM and/or the EMD. There is no cavil that PDM and EMD are like earnest money, which was required to be deposited for participating in the bidding process.

The Court first noted that Regulation 33(1) of the IBBI Regulations states that the liquidator shall “ordinarily” sell assets in the manner specified in Schedule I.

The use of the word “ordinarily,” the Bench held, indicates that Schedule I is not mandatory in all circumstances. The liquidator is therefore permitted to frame additional or stricter terms in the Auction Memorandum, so long as they do not contradict the Code.

The Court then examined Rule 1(3) of Schedule I, which expressly authorises the liquidator to “prepare terms and conditions of sale, including reserve price [and] earnest money deposit.” Since the Regulations do not prohibit forfeiture, the liquidator’s inclusion of a forfeiture clause was not ultra vires.

The Bench noted that Schedule I does not prohibit forfeiture of earnest money, nor does it prescribe an exhaustive code of auction conditions. Instead, it expressly empowers the liquidator to craft the auction architecture.

Since the IBBI Regulations did not bar forfeiture, the liquidator’s inclusion of a forfeiture clause in Clause 4.13 of the Auction Memorandum was held to be fully consistent with Schedule I.

Crucially, the Court held that Regulation 33 and Schedule I must be read together, and when so read, they do not restrict the liquidator from imposing stricter conditions, such as mandatory acceptance of the LOI within two days, or forfeiture upon refusal.

The Bench observed that the bidder had unconditionally accepted the Auction Memorandum at the time of bidding and could not later challenge its terms after defaulting.

Since the bidder expressly refused to accept the LOI and declined to proceed with the project obligations under Clause 4.3, the liquidator was entitled to invoke the forfeiture clause.

Finally, the Court rejected the argument that the absence of a forfeiture provision in Schedule I (as it existed at the time) rendered the Auction Memorandum ultra vires.

The Bench held that Schedule I is not an exclusionary code, and Regulation 33 does not preclude the liquidator from supplementing it. The Court concluded that the liquidator’s terms were lawful, commercially justified, and binding on the bidder. As a result, the forfeiture of EMD and PDM, amounting to 5.08% of the bid value, was upheld in full.

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